Four sector economy refers to which of the following?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Open Economy
An economy can be seen as made up of four sectors: households, firms, government and the external sector. The external sector is the rest of the world, so these four together describe an economy that trades with other countries.
Option (1) Closed Economy — Incorrect. A closed economy has no linkages with the rest of the world, so it has no external sector.
Option (2) Mixed Economy — Incorrect. In a mixed economy, the government and the market together decide what to produce, how to produce and how to distribute it. This describes who takes decisions, and the count of sectors does not come into it.
Option (3) Planned Economy — Incorrect. In a centrally planned economy, the government or central authority plans all the important activities. This too is about who takes decisions.
Option (4) Open Economy — Correct. An open economy interacts with other countries, so it has the external sector along with the other three.
NCERT (2026-27): “…So far we have described the major players in the domestic economy. But all the countries of the world are also engaged in external trade. The external sector is the fourth important sector in our study.… …Macroeconomics sees an economy as a combination of four sectors, namely households, firms, government and external sector.… Introductory Macroeconomics — Chapter 6: An open economy is one which interacts with other countries through various channels. So far we had not considered this aspect and just limited to a closed economy in which there are no linkages with the rest of the world in order to simplify our analysis and explain the basic macroeconomic mechanisms.… Introductory Microeconomics — Chapter 1, The Centrally Planned Economy: In a centrally planned economy, the government or the central authority plans all the important activities in the economy.… Indian Economic Development — Chapter 2: …Most economies are mixed economies, i.e. the government and the market together answer the three questions of what to produce, how to produce and how to distribute what is produced.…” |